Vietnam Today

Foundations in place for franchises to flourish

Released at: 14:20, 07/05/2016

Vietnam has almost everything needed for franchises to really take off.

by Tue Lam

Mr. Scott McDaniel, Senior International Development Director at New Horizons Computer Learning Centers, the largest independent information technology (IT) training company in the world, told VET that a number of IT service companies in Vietnam could secure external clients and throw out a challenge to the dominance of India and the Philippines in IT outsourcing. With excellent growth in IT, Mr. McDaniel revealed that New Horizons will launch its business in Vietnam this year via a franchise after finding partners.

2015 saw a number of foreign investors arriving in Vietnam and investing in the market via franchises. The development plan of New Horizons can be viewed as proof that Vietnam not only attracts franchises in traditional sectors such as food and beverages but also in other fields such as education, training, and services. With a number of free trade agreements signed and the ASEAN Economic Community to come into being, franchises are expected to boom in Vietnam in the time to come.

Signs of a boom

Vietnam is a destination of some potential for franchises. According to figures from the Ministry of Industry and Trade, since 2007 it has licensed more than 140 foreign brand franchises in the country. Ms. Nguyen Phi Van, Chairman of Retail & Franchise Asia, which represents many foreign franchisors in Vietnam, said there are about 40 foreign brands seeking partners in the country. Ninety per cent are from the EU and the US, primarily in the fields of food, education and training, and gymnasiums. The number of franchise businesses in Vietnam is forecast to increase substantially given the number of free trade agreements (FTAs) the country has signed.

The recent FTA with the EU and, more importantly, the upcoming TPP, promise to be beneficial for Vietnam, Mr. Sean T. Ngo, CEO of VF Franchise Consulting and Southeast Asia Managing Director of Edwards Global Services (EGS), told VET. While industries such as manufacturing, textiles, and food processing are sure to benefit, other businesses that are in franchising industries will also do well as equipment, furniture and fixtures, and raw materials can now be imported into Vietnam more cost effectively.

Meanwhile, when the AEC materializes it promises even more benefits, as the focus in franchising is to offer products and services that cater to the ASEAN consumer versus traditionally focusing on any one country within ASEAN, Mr. Ngo believes. “This will help many regional franchises to successfully enter markets like Vietnam and for Vietnamese franchises to also expand further into the region,” he said, adding that the flow of professional staff between member countries will also help speed up the development of Vietnam’s franchise industry.

In franchises, one of the costs that has the greatest impact on business performance is the price of products, according to Ms. Van. High import duties have caused many difficulties for Vietnamese enterprises after franchising an international business. For small enterprises with limited capital this is considered a major challenge. With these FTAs being signed the difficulties will almost immediately be removed, she said. “Tariff rates of zero or nearly zero will see gross profits increase sharply, resolving a persistent problem in franchising,” she said. “Franchising will then develop more actively and effectively in Vietnam in the years ahead.”

Not only growing in terms of quantity, franchises in Vietnam are also expected to diversify and develop in many fields. Apart from food and retail, the service industry also has considerable potential. As disposable incomes increase, demand among families and individuals also rise, especially in educational services, medical services, and healthcare. “Although 90 per cent of franchise brands are in the food industry, over the next five years, as the market thrives, the percentage of franchises in the service industry will increase substantially,” Ms. Van said.

According to Mr. McDaniel, Vietnam has great potential for the development of IT training franchises. The country has maintained annual GDP growth of around 6 per cent over the last five years and IDC has predicted IT spending will see a compounded annual growth rate of 12.3 per cent from 2014-2018. “We are confident the skill sets needed by professionals and individuals that have already graduated from university and are now employed in the industry will need to further develop over the next decade as the IT industry continues to evolve,” he said. “The more that Vietnam is linked into the global economy the more IT skills will be needed in the country and throughout the region.”

Major attraction

It is clear that franchises in Vietnam are growing strongly and becoming more diverse than ever. So the question is why is this the case? Historical elements are seen as one factor, but the economics, size, and geography of the country are even more important. Within ASEAN, Vietnam has had the highest GDP growth rate over the last decade. What is even more impressive is that this growth rate is based on a sizeable population base of nearly 95 million people, which is growing by 1 per cent each year. A fast-growing economy with a lot of people equates to not only a large workforce in the future but also a workforce that has increasingly higher incomes and higher demand for better goods and services.

Ms. Van believes that Vietnam possesses the three factors needed for the development of franchising. Besides its large market size, the country’s stable macro-economic situation is also key to development. In 2016, she said, the Asia-Pacific region is predicted to see the highest spending growth in the world, at 4.6 per cent, while regions with high growth in franchising are experiencing significant declines: North America, with only 3 per cent, Australia and New Zealand just over 2 per cent, and Western Europe below 2 per cent. Therefore, strategies to boost franchising around the world will undoubtedly focus on Asia-Pacific. In this sense, excluding the two huge markets of China and India, ASEAN and its 600 million people is considered an ideal destination, as is Vietnam.

Challenges ahead

Despite its huge potential, Vietnamese enterprises have not really seized the opportunities from franchising. Main drawbacks include inefficient operations, weak management, and lack of finances. If a particular company wants to promote its franchise activities to the world its internal resources and financial capacity have to be extremely efficient, providing a prime example for partners. According to Ms. Van, Vietnamese enterprises are short of such things. Small and medium-sized enterprises in the country are now involved in more than 500 business sectors and account for 96 per cent of all businesses and contribute 40 per cent of GDP. Despite their sizable number, though, they continue to grapple with a range of shortcomings.

For foreign enterprises wanting to promote franchises in Vietnam, while the middle class in Vietnam is growing, Mr. Ngo noted, they are also very price-sensitive. Creating the right pricing strategy will be critical to success, as consumers typically have lower disposable incomes than consumers in other ASEAN markets. There is also the complexity of understanding the different consumers within Vietnam itself. Consumers tend to have different purchasing behavior and characteristics as one moves from north to south and vice-versa. With many operational and development challenges, one of the key challenges for any franchisor is the availability of good, quality premises that are affordable. “Vietnam’s modern retail real estate inventory is still developing and quality is still missing from many projects, both current and future,” he said. “Even when quality is found, the often high cost of leasing in Vietnam may make these locations unprofitable and non-sustainable.”

“Vietnam is one of a handful of countries in ASEAN that has specific franchising laws. Foreign firms must make early preparations before entering Vietnam and registrations of trademarks and logos can take a long time.”

“International enterprises wanting to promote their franchise activities in Vietnam should not be too rigid in finding partners with wide and valuable experience in the industry. They should give heed to internal resources, financial capability, and the ability to manage, because with a long history focusing mainly on agriculture, production, processing, and distribution, the experience of Vietnamese enterprises in the service industry is extremely limited.”